Thursday, July 2, 2009

Govt may borrow Rs 40k cr more in FY10

With the full Budget to be presented on Monday, the bond market is awaiting clarity on the quantum of upward revision in the borrowing targets.

According to a senior official at the Reserve Bank of India, who requested anonymity, finance ministry is working on the size of upward revision and depending on size of the revision the borrowings calendar will be reviewed. The upward revision is expected to be about Rs 40,000 crore and if the borrowings announced are higher, “alternate means” of raising debt will be looked at, he added.

The borrowing calendar gives the schedule of government bond auctions and the mix of securities on auction. The government would have raised Rs 1,62,000 crore in current fiscal, Rs 15,000 crore higher than the original projection.

The size of upward revision in borrowings is a concern as the rising debt burden would crowd out productive private investments and a high debt-to-GDP ratio will add to inflationary expectations as the faith in the government’s openness to make necessary fiscal adjustment declines.

According to four primary dealers in government paper whom ET talked to, the markets have already factored in an upward revision of up to Rs 50,000 crore in borrowing targets for the financial year. Hence, any upside to this is expected to push up the yields. Head of treasury at IDBI Gilts (primary dealer in government paper) S Raghavan said, “The market is expecting the fiscal stimulus measures announced in the Budget to be in the range of 1% of GDP. So the yields have already factored in an additional borrowing of Rs 40,000 crore and any upside risk to this can lead to firming up of yields.”

But some economists are expecting the additional borrowings to be way below the market consensus. Abheek Barua, chief economist at HDFC Bank, said the additional borrowing could be as low as Rs 10,000 crore as the inflows from disinvestment and 3G auction will help the government plug the fiscal gap.

“The markets are factoring in an increase of close to Rs 50,000 crore. At Rs 10,000 crore, our estimate of additional net borrowings is much smaller. This is likely to send the yield on the 6.05% 2019 paper lower to 6.25-6.3% from its current trading range of 6.9-7.0%,” said Mr Barua.

Yields across maturities fell on Wednesday as banks took positions as statutory reserves at the start of new quarter and no auction is announced for the current week. Traders pointed out that the yields will ease only to a limited extent before the budget and clarity emerge on borrowings.